China’s economic challenges, Europe's downturn and the war in Ukraine

Chinese President Xi Jinping China

Twenty-eight of China’s 31 provincial-level governments announced reduced growth targets and policy goals for 2022 as compared to previous years amidst the country's economic slowdown.

Even more developed regions such as Shanghai, Guangdong and Beijing targeted a lower growth rate of 5-5.5% as against 6% in the previous year, and this was announced before the Ukraine War broke out.

The official claims of the economy having picked up are not matching with the weakening external demand, the Hong Kong Post reported.

President Xi Jinping is particularly worried about the bleak economic outlook of the country as it may adversely impact his bid for another term at the 20th Party Congress later this year.

Local governments across China had ordered teachers and officials to pay back bonuses; civil service bonuses had been suspended in Shanghai, Jiangxi, Henan, Shandong, Chongqing, Hubei and Guangdong.

The demand for bonus reversals indicates that the Chinese government was undergoing something of a fiscal crisis.

The fiscal health of Chinese local governments seems to have deteriorated, especially since the first half of 2020. All the provinces except Shanghai reported fiscal deficits, implying that they expended more than they earned.

Rising unemployment due to pandemic-led dislocations among the youth may dent the popularity of the Chinese government and the CPC. The situation in job market further worsened due to regulatory crackdowns on private tech companies by the government.

Russia’s war against Ukraine has heightened uncertainty over the outlook for global trade this year.Outbound shipments rose 16.3% in the first two months of the year from the same period a year earlier, official data showed on Monday, beating analyst expectations for a 15.0% rise, but down from 20.9% gain in December.

Imports increased 15.5%, easing from a 19.5% gain in December and below the forecast 16.5% increase.

The customs agency publishes combined January and February trade data to smooth distortions caused by the Lunar New Year, which can fall in either month.Factory activity normally slows considerably during the long holiday as workers return to their home towns. But for the third year in a row, many factory workers did not return home because of concerns about COVID-19, which kept some factories operating.

“These numbers will probably be well received. China’s exports are high and also the imports are continuing,” said Louis Kujis, Asia Pacific chief economist at S&P Global Ratings, adding that exports remain one component of the economy that are still supporting growth.

“We need to see how long the economic impact (from the Ukraine crisis) will last. China’s economy overall is big and should be to able to continue to grow even in the face of external shocks but export growth will be affected.”

China’s booming exports outperformed expectations for much of last year and buoyed growth in the world’s second-largest economy, but analysts expect shipments to slow eventually as overseas demand for goods eases and high costs pressure exporters.

Beijing has targeted slower economic growth of around 5.5% this year amid an uncertain global recovery and a downturn in the country’s vast property sector. While that would mark a sharp slowdown in annual growth, it is nonetheless an ambitious target that would require more policy support, analysts say.

“With the Ukraine crisis imposing downside risk to global demand, China will have to rely more on domestic demand in 2022,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “Now the pressure is on the fiscal policy to deliver.”Russia’s invasion of Ukraine late last month and mounting international sanctions on Moscow have raised fresh risks for the global economy, adding to months-long strains for China’s factories from worldwide supply chain snags.

Chinese exporters with exposure to Ukrainian markets have delayed shipments, while some factories with business in Russia have been waiting for payment from their clients before arranging the next shipments, factory officials and analysts told Reuters.

Tian Yun, former vice director of the Beijing Economic Operation Association, expects China-Europe trade may be disrupted due to the conflict in Ukraine.

“If the Ukraine crisis halts China-EU freight train services or lead to a slower operation efficiency, there will be adverse impact to EU and China’s trade. This might be the biggest risk,” Tian said.

China posted a trade surplus of $115.95 billion in the same period, above the forecast $99.50 billion surplus and December’s $94.46 billion surplus.

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